Updated on Dec. 1, 2021.
SinoInsight 1
On Sept. 24, a copy of China Evergrande Group’s Aug. 24 letter to the Guangdong government circulated on the Chinese internet and was reported by major Western news outlets. In the letter, Evergrande, China’s second-largest property developer by sales, sought government help for a restructuring plan needed to secure listing on the Shenzhen stock exchange and avoid a credit crunch. If Evergrande failed to win approval for listing by Jan. 31, 2021, it would have to pay investors up to 143.7 billion yuan ($21 billion) in dividends and interest, or over 90 percent of its cash and cash equivalents.
Evergrande also revealed in the letter that its total debt at the time amounted to 835.5 billion yuan, and involved 128 banking and financial institutions (232.3 billion yuan), 121 non-banking and financial institutions (368.4 billion yuan), domestic corporate bonds (49.6 billion yuan) and overseas bonds (185.2 billion yuan). The company added that if it fails to secure funds via listing, it would lead to “cross defaults” in the company’s borrowings from banks, funds, and the bond market, resulting in systematic risks for China’s financial system.
Other debt problems mentioned in the letter include:
- 8,441 upstream and downstream enterprises will be affected by Evergrande’s cash crunch.
- Evergrande has a total of 617,000 commercial property units sold, but not yet delivered, to 2.04 million buyers.
- Evergrande’s cash crunch will plunge the company into crisis and directly impact 3.31 million jobs.
Evergrande’s letter led to sharp declines in its stocks and bonds on Sept. 24. S&P Global cut its outlook on the company’s B+ rating from stable to negative, but added that the company’s sales will likely remain stable in 2021. Evergrande later denied the letter, claiming it was “fabricated.”
OUR TAKE
1. We have repeatedly warned throughout the year about China’s property bubble and systemic financial risks in past issues of this newsletter. Beijing now has a classic “too big to fail” case on its hands with Evergrande’s debt woes, and we are likely only seeing the tip of the iceberg of crisis-level problems in China’s financial sector.
2. Despite Evergrande’s denials, the letter to the Guangdong government on Aug. 24 is very likely authentic. Our readers know from an earlier newsletter about the Aug. 17 “three red lines” government proposal to curb the issue of interest-bearing bonds by real estate enterprises. We noted that three of the top 10 property companies in China, namely, Evergrande, Sunac Holdings, Greenland Holdings, have transgressed all three of the “red lines” and are ineligible for refinancing through bond issuance once government policy goes into effect. It is likely no coincidence Evergrande’s letter to the Guangdong government is dated mere days after the Aug. 17 proposal, as it sought alternative channels of refinancing.
Beijing has good reason to consider Evergrande’s plea. The company warned in its letter of “cross defaults” triggering systematic financial risks, if it fails to get listed. Evergrande is one of China’s largest property developers with projects in over 200 cities across the country. The company is also involved in the automobile industry, tourism, sports, finance, healthcare, and elderly care. With total assets of 2.3 trillion yuan, Evergrande Group is ranked 152nd among the Fortune Global 500 in 2020. The collapse of “too big to fail” Evergrande will trigger the collapse of several high-risk small and medium-sized banks, result in unemployment for millions, and exacerbate China’s social problems. Even worse, the bankruptcy and liquidation of Evergrande will cause property prices to plummet and trigger a vicious cycle of collateral depreciation and rising debt ratios, with dire implications for China’s property bubble.
Beijing, however, will suffer if it bails out Evergrande, as other Chinese property firms will also want government support. To better understand the scale of indebtedness of property companies, we use PRC National Bureau of Statistics data to calculate their “cash flow” (subtract 15 percent of tax revenue from sales of commercial properties, followed by subtracting actual investment funds for real estate development during the year). Per our calculations, Chinese property companies on the whole have negative cash flow, or minus 55.65 trillion yuan, from the year 2000 to August 2020. This figure is equivalent to Evergrande’s current debt times 62, and one Beijing is unable to finance. The CCP will have massive headaches if even only the top few property companies clamor for bailouts; according to financial data company Tianfeng Securities Research Institute, only 12 of China’s top 50 real estate companies have not crossed any of the “three red lines” requirement to secure refinancing via bond issuance, while 14 of the 50 have crossed all the “red lines.”
3. Genuine financial issues aside, the timing of the leak of Evergrande’s letter and the company leadership’s ties to the CCP elite suggest factional struggle factors cannot be ruled out.
In the last newsletter, we explained the importance of the coming Fifth Plenum for Xi Jinping and his factional rivals. We also listed tactics the “anti-Xi coalition” could employ against Xi before the plenum, including inciting an economic or financial coup.
Virtually all large companies and financiers in China have powerful political backers within the Party elite due to the political culture of the CCP regime. In return for political support, top executives and financiers sometimes serve as “white gloves” (白手套) or “bagmen” for the CCP elite. For instance, Tomorrow Group’s Xiao Jianhua is an example of a so-called “white glove.”
Publicly available information reveals ties between Evergrande boss Xu Jiayin and the clan of Zeng Qinghong, the former PRC vice president, Politburo Standing Committee member, and the no. 2 person in the Jiang Zemin faction. According to various news reports, the Australian government forced Xu to sell a $40 million mansion in Sydney’s prime Point Piper neighborhood in March 2015 that he had previously allowed Zeng Wei, the son of Zeng Qinghong, to reside. The person who bought the mansion, LL International director Lola Wang Li, once attended a party Zeng Wei hosted at the mansion, and Zeng is a prominent stakeholder in her company.
Details of Xu Jiayin’s ties with the Zeng clan do not necessarily corroborate a patron-client relationship. However, it is noteworthy that Xu has survived Xi Jinping’s anti-corruption campaign relatively unscathed thus far despite numerous rumors he was being investigated and/or restricted from leaving the country. It is also noteworthy that Xu has been “allowed” to keep his wealth when other well-connected private entrepreneurs have been probed and forced to sell off their assets to pay off debts. Even Wanda Group chairman Wang Jianlin, whose company the Xi clan had a stake in before 2012, was restricted from leaving the country in 2017 and later sold half of his assets to pay off debts, by his own account. This suggests that Xu Jiayin’s political patron is unusually powerful and someone Xi cannot easily move against—a profile that matches Zeng Qinghong, who has deep roots in the CCP’s intelligence apparatus. Xi only started making headway in consolidating control over that apparatus in 2018 through a government chain-of-command reform.
SinoInsight 2
Recently, Xi Jinping made political gestures to assume personal responsibility for “good results” pertaining to coronavirus, food production, and “social stability” in Xinjiang Province:
Coronavirus
On Sept. 7, state mouthpiece Xinhua issued a feature article titled, “Xi Jinping Leads China’s War Against the Epidemic” (特稿：習近平領導中國戰“疫”). The article burnishes Xi’s role in the CCP’s coronavirus work and repeats a controversial point about Xi issuing requirements for epidemic prevention and control during a Jan. 7, 2020 meeting of the Politburo Standing Committee. On the same day, Xinhua also ran an article with the headline, “A Critical Decision at a Key Moment—General Secretary Xi Jinping Makes Major Policy Move to Close China’s Borders” (關鍵時刻的關鍵抉擇——習近平總書記作出關閉離漢通道重大決策綜述).
On Sept. 8, Xi presided over an awards ceremony recognizing COVID-19 heroes. “Party Central has taken full command of the situation and acted decisively,” he said.
Food
On Sept. 22, Xinhua issued a feature in a series titled “Matters General Secretary Xi Jinping is Concerned With” (習近平總書記關切事) on China’s “bumper harvest” this year.
Xinjiang
On Sept. 25 and Sept. 26, Xi chaired the Third Central Symposium on Xinjiang Work in Beijing, a high-level Party meeting on the far western province. In a speech, Xi said that the CCP’s Xinjiang policies are “totally correct and must carry on for a long time.” The headline of a China Daily report on the meeting read, “Xi Jinping: Confidently Promote the Good Situation of Social Stability in Xinjiang” (習近平：理直氣壯宣傳新疆社會穩定的大好局勢).
OUR TAKE
1. Xi Jinping is undertaking huge personal risks by assuming personal responsibility for the three issues above, issues the CCP has handled poorly and/or draw international criticism over.
Coronavirus
Beijing has been widely criticized for its slow response to the coronavirus outbreak. A scientific study published in March noted virus cases could have been reduced by 95 percent had China reacted three weeks earlier than it officially did on Jan. 21. Meanwhile, the CCP continues to cover up the origins of the virus and the actual epidemic situation in China. By emphasizing his role in the CCP’s early coronavirus response and epidemic control measures (including lockdowns and vaccines), Xi is making it nearly impossible to absolve himself of blame should the need arise later.
Food
We have been tracking China’s food shortages and bad harvests since 2018. Newly emerging data points verify our analysis of the food situation in China.
On Sept. 20, The Financial Times cited Enodo Economics’ chief economist Diana Choyleva as saying that China has less than 100,000 tonnes of pork reserves remaining. “At this rate, within two to three months they’ll be out,” she said. Enodo estimates that China’s pork reserves fell by 452,000 tonnes between September 2019 and August this year. And in a recent China livestock report, the U.S. agricultural attaché in Beijing noted that “pork reserves appear to have been mostly depleted by the third quarter of 2020.”
On Sept. 22, the Heilongjiang provincial government announced it would subsidize rice and corn harvest equipment for farmers, to lessen their burden after a typhoon struck China’s northeastern breadbasket region. Additionally, Heilongjiang’s Banking and Insurance Regulatory Commission recently found in a survey that 29.3 million mu (about 1.95 million hectares) of insurance-covered farm land had been damaged by the typhoon. Of the 29.3 million mu, 1.02 million mu are no longer arable while 28.28 million mu will reduce output. Preliminary estimates of disaster damage amounted to 2.581 billion yuan (about $378.235 million).
Also on Sept. 22, a dam in Heilongjiang’s Zhaoyuan County suddenly burst its banks, flooding 70,000 mu of paddy fields, ravaging the nearly ripe rice harvest. Local farmers estimate their losses to be in the hundreds of millions of yuan. That same day, Songhua River, which passes through Heilongjiang Province, started flooding again.
Xinjiang
Beijing has been strongly condemned by the international community over its mass incarceration of Uyghur Muslims in Xinjiang. Secretary of State Mike Pompeo described the CCP’s persecution in Xinjiang as the “stain of the century, and the U.S. has since targeted individual CCP officials and the Xinjiang Production and Construction Corps with sanctions for human rights abuses.
2. A true second wave of the virus, a worsening of food shortages, and stronger international action against the CCP for its Xinjiang persecution campaign would deliver a serious blow to Xi Jinping’s “quan wei” (權威) and provide golden opportunities for his factional rivals to move in for the kill. Ironically, Xi has no choice but to take the risk and play up his personal responsibility in the “success” of the aforementioned three issues to cling to his paramount position. To maintain his strongman rule over the regime, CCP political orthodoxy requires Xi to reframe setbacks as victories to bolster his “quan wei” (especially with factional struggle problems ahead of the Fifth Plenum) and to perpetuate the “cult of personality.” Admitting policy failures will only destroy Xi and the Party’s “great, glorious, correct” image, undermining their political legitimacy during a crisis period for the CCP regime. Come crunch time, however, the CCP will gladly sacrifice Xi to preserve its regime.
3. The confluence of pressing problems facing the CCP regime is creating a conducive environment for political Black Swans to emerge. Businesses, investors, and governments need to track political developments closely and prepare for tremendous change in China.
